How to Value an Essential Oil Business
Essential oils carry the scent of particular plants such as lavender, peppermint, lemon, etc… These oils are used for a variety of purposes including aromatherapy, skincare, and massage therapy. The essential oil industry has benefited from trends in natural health, growing wellness and spa industries, and homemade skincare products. As such, this industry generates hundreds of millions of dollars each year. If you are looking to buy, grow, or sell an essential oil business, now may be a good time to do so. However, the essential oil industry is extremely competitive. To succeed, it is important to learn how to value an essential oil business. This can help you understand what steps to take to succeed in this industry.
There are many factors to consider when valuing an essential oil business. The valuation process can be complex. As such, it is best to receive a business valuation. As part of a business valuation, experts use valuation methods to determine the fair market value of an essential oil business. In this article, we highlight two common valuation methods an expert may use in a business valuation. Keep in mind, this article is only a guide. For more accurate information about valuing an essential oil business, receive a business valuation.
Peak Business Valuation, business appraiser, is happy to help! We value many essential oil businesses throughout the nation. Peak can provide you with a business valuation and answer any questions you have. Schedule a free consultation with Peak Business Valuation today!
How to Value an Essential Oil Business
Peak Business Valuation is a professional business appraiser. Our business appraisers often use the market approach and/or the income approach to value an essential oil business. As part of the valuation process, the appraiser determines the best method for valuing an essential oil business. This may include using a combination of valuation approaches.
Valuing an Essential Oil Business Using the Market Approach
The market approach is a common method for valuing essential oil businesses. To understand this method, consider the approach real estate appraisers use to value a house. Real estate appraisers look at similar properties that recently sold to determine a fair value for the home. When using the market approach, a business appraiser looks at similar businesses that recently sold. If the essential oil business is private, the analyst refers to private transaction databases.
Multiples for an Essential Oil Business
Valuation multiples are a crucial component when working with the market approach. Valuation multiples are similar to ratios. They compare the value of an essential oil business to a financial metric such as earnings, cash flow, and sales. To find the proper valuation multiples for an essential oil business, business appraisers use the applicable NAICS or SIC code. Below, we discuss the basics of valuation multiples for an essential oil business.
SDE (Seller’s Discretionary Earnings) Multiple for an Essential Oil Business
- The SDE multiple measures the value of a business based on its seller’s discretionary earnings. This involves multiplying a business’s SDE by the multiple. SDE multiples are common when valuing an essential oil business.
EBITDA Multiple for an Essential Oil Business
- EBITDA multiples help determine the return on investment an operator can expect from the essential oil business.
REVENUE or SALES Multiple for an Essential Oil Business
- The revenue multiple measures the value of an essential oil business based on the amount of revenue it generates. Multiply the business’s revenue by the multiple to determine the fair market value of an essential oil business.
For more information, read Valuing an Essential Oil Business.
Valuing an Essential Oil Business Using the Income Approach
The income approach is another popular valuation method for knowing how to value an essential oil business. This approach evaluates the risks associated with the business. Below are a few common risks that an analyst considers when valuing an essential oil business.
- Supplier Relationships. Having strong supplier relationships comes with many benefits for an essential oil business. This can include reduced expenses on bulk purchases which increases profitability.
- Regulatory Compliance. Essential oils are subject to regulations regarding product safety, labeling, and advertising claims. Failure to comply can lead to legal issues.
- Brand Reputation. Many customers use essential oil products for health purposes. As such, it is vital for essential oil businesses to build a strong reputation.
- Quality Control. Essential oil should be of high quality. This ensures customer satisfaction which can strengthen the reputation of your business.
Methods to Value an Essential Oil Business Using the Income Approach
There are two popular methods valuation experts use under the income approach. They are the capitalization of cash flow method and discounted cash flow method. Below, we discuss how to value an essential oil business using these valuation methods.
Capitalization of Cash Flow Method
- The capitalization of cash flow method is ideal for essential oil businesses with long and stable histories. When using the capitalization of cash flow method, valuation experts determine a reasonable amount of economic income for one period. This time frame before or after the appraisal date is divided by an appropriate capitalization rate. The capitalization rate reflects an accurate rate of return a buyer can expect. In addition, the capitalization of cash flow method analyzes any risks associated with buying or selling an essential oil business.
Discounted Cash Flow Method
- Typically, the discounted cash flow method is best for businesses with a strong financial history. Additionally, companies that have built reliable forecasts benefit from the discounted cash flow method. This method uses 3-5 years of projections to determine the value of future cash flows at an essential oil business. The business appraiser discounts the future cash flows using a discount rate instead of a capitalization rate. This process allows them to estimate the fair market value of an essential oil business. Keep in mind, this method is less reliable since it uses future cash flow estimates which can be subjective.
Summary
There are various valuation methods a valuation analyst may use to value an essential oil business. At Peak Business Valuation, valuation experts often use the market approach and/or the income approach for valuing an essential oil business. To understand which valuation method is most suitable for an essential oil business, receive a business valuation. During a business valuation, a valuation expert helps you understand the value of an essential oil business. They may also discuss the strengths and weaknesses of your essential oil business. This is important whether you are buying, growing, or selling an essential oil business.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we work with many essential oil businesses across the country. We are happy to provide you with a business valuation for an essential oil business. In addition, we can answer any questions you may have about how to value an essential oil business. Start today by scheduling a free consultation with Peak Business Valuation!
